99 Cents Only Stores: IT Infrastructure on a Budget

99 Cents Only Stores is one of the leading retailers in the deep-discount sales industry.The first 99 Cents Only Store opened in 1982, and as of March 31, 2006, the companyoperates 232 retail locations, including 164 in California, 36 in Texas, 21 in Arizona, and11 in Nevada. The stores carry mostly name-brand general merchandise, including foodand beverages, health and beauty aids, cleaning supplies, house wares, hardware,stationery, toys, gifts, pet products, and clothing.

The chain makes purchases from over a thousand suppliers, including such notables asGeneral Electric, Colgate-Palmolive, General Mills, Johnson & Johnson, Procter &Gamble, Kraft, Nabisco, and Unilever. Stores cover an average of 22,000 square feet, andaverage $4.3 million in net sales per store. Overall, 99 Cents Only Stores experienced a13 percent company-wide increase in sales in 2004, totaling $972 million. By 2006, totalsales projected to over $1 billion.The majority of products can be restocked regularly. 99 Cents Only Stores also featureclose-out merchandise, which is not available for reorder. The deep-discount industry ischaracterized by the purchase of close-out and special opportunity merchandise at costsbelow wholesale. Deep-discount retailers pass the savings on wholesale from thesepurchases to customers, who are able to buy products at prices that are well below retail.There is increasing competition with other deep-discount retailers for this special-situation merchandise, and some competitors have more financial resources and buyingpower than 99 Cents Only.99 Cents Only Stores' recipe for continued growth is to open more stores whileexpanding same-store sales and trying to wring more out of each dollar to keep profitmargins higher than competitors. The company has set a target of expanding its storesquare footage by 25 percent every year and believes that the states in which it alreadyoperates have the potential to support over 400 stores. Approximately half of the newstores launched in 2004 were in Texas. These stores are serviced by a 741,000-square-foot distribution center near Houston that the company purchased for $23 million in2003.How does 99 Cents Only Stores manage its widespread chain of stores while keepingdown costs? The answer is, with information technology, but on a budget. In 2003,despite opening 38 new stores and beginning operations in the new distribution center inTexas, the company's IT budget did not surpass $5 million. Although David Gold, 99Cents Only's founder and chairman, resists computer technology in his own office, heknows that computers have played a large role in enabling his company to grow. Goldintroduced Radio Shack TRS-80 personal computers to the business in the 1980s. Gold'sson, Jeff, now president and COO, programmed the company's first order-entry andwarehouse inventory systems on those computers.Today the company obviously requires far more computing power. The task of choosingand implementing that power without breaking the bank fell to Robert Adams, vicepresident of information services for 99 Cents Only Stores. 99 Cents Only Stores is not atypical single price point business. The average 99 Cents Only Store is about five timeslarger than the industry standard and generates approximately four times more in salesthan its competitors ($4.3 million to $1 million). 99 Cents Only Stores also differs fromits competitors in its target customer demographic, even pursuing locations in high-income areas. David Gold says, "Rich people like to save money too, and they do it inhigher volumes."With these factors in mind, Robert Adams continues to improve and expand the companywhile keeping the clientele satisfied and not spending too much money. For example, hesaved the company tens of thousands of dollars on database management softwarelicenses by searching the Web for the best price available rather than simply defaulting tothe usual vendor. Adams acknowledges that he is able to make such decisions becausethe company is family-owned and -run, which concentrates the power among only a fewpeople. In fact, most projects that the company takes on are implemented rapidly becausethere are fewer people involved in the decision-making process.At every step of the way, Adams evaluates actual cost versus business value to thecompany of every initiative, whether it involves technology, real estate, or the melding ofthe two. Because Adams has a programming background, when it comes time for thecompany to deploy a new system, he can effectively weigh the cost of purchasingsoftware off the shelf against the cost of writing the software code himself or with his ITteam. Because 40 percent of 99 Cents Only Stores' products flow through the inventoryonly once because they are close-out items, the company's systems need to be veryflexible to deal with unique nonrepeating items in inventory. Given these parameters,Adams often finds that the cost of buying prepackaged software combined with the timeand cost required to customize such software for the deep-discount business makesprogramming the company's systems in-house the better option.One of Adams's greatest challenges was launching the company's new distribution centerin Texas in 2003. The sale of the facility, which David Gold purchased for $23 millionfrom Albertsons, included over 200,000 square feet of refrigerated storage,approximately 500,000 square feet of dry storage, forklifts, cabling, and furniture.Working with a tight time constraint, Adams had to decide between revising thewarehouse management system he had designed for the company's distribution center inCity of Commerce, California, so that it could be used in Texas and purchasing a systemfrom a developer or vendor. Adams already knew that his own system would have to bereplaced in California to keep up with the company's aggressive growth plans, so he setabout finding a warehouse management system that allowed for the degree and ease ofcustomization that his company would require.In addition to carrying close-out merchandise that only goes through inventory once, 99Cents Only Stores sometimes receives shipments of products that aren't exactly what thecompany ordered. However, as Adams says, "We have to accept it, get it to our stores,and turn it fast." A system that would lock out such shipments because of inflexible ruleswould be a hindrance to the business.Adams found the flexibility he needed in HighJump Software's Supply Chain Advantagesoftware. The HighJump package addressed all of the major concerns related to theoperation of the new distribution center: quick implementation, high functionality(particularly in regard to receiving), adaptability, and interoperability with the advancedautomation technology of the new distribution center. One of the most attractive aspectsof the package was that it didn't force 99 Cents Only Stores to change its businessprocesses to conform to the structure of the system.Christopher Heim, who retired as president and CEO of HighJump in 2006, explains thathis company basically developed a set of tools that enables users to build their own setsof functions according to the needs of their particular businesses, "almost akin to anExcel spreadsheet." The Supply Chain Advantage system is designed in such a way thatusers can make changes themselves instead of relying on IT specialists, the vendor, oroutside sources to upgrade and manage the system. This is especially important toAdams, who likes to avoid recurring costs that can drain a company's budget.HighJump developers worked with Adams and his staff to integrate the system with thespecific needs of 99 Cents Only Stores, including a radio frequency identification (RFID)system and a voice-based inventory picking system. The Supply Chain Advantagepackage includes a warehouse management system, Warehouse Advantage, that tracksthe status of every product during its time in the warehouse. Warehouse Advantage worksclosely with a Voxware voice-based picking system, which instructs warehouseemployees known as "pickers" to retrieve products that need to be released from thewarehouse for shipment to stores. The Voxware system also informs pickers whenstorage bins need to be refilled and where to find replenishments.The Supply Chain Advantage software module called Yard Advantage manages thecompany's delivery trucks, directing them to the proper locations for loading or unloadingand monitoring the inventory that each truck is carrying. Customer Service Advantagecreates a portal that employees at 99 Cents Only Stores retail locations can use to checkon scheduled shipments. Managers use Advantage Dashboard to monitor the performanceof both facilities and workers using charts and graphs that update in real time. EventAdvantage alerts warehouse managers to unforeseen problems in the supply chain beforethey can have a negative effect on profit margin.Adams was sufficiently satisfied with HighJump's solutions to plan for implementation ofthe Supply Chain Advantage systems at his company's City of Commerce distributioncenter. The process of installing the systems in this California center could be morecomplex because the center operates three shifts and employees need retraining.Furthermore, the City of Commerce center already serves 150 of 99 Cents Only Stores'retail locations. When the Texas center went online, it was responsible for far fewerstores. Adams also decided that the receiving process in City of Commerce shouldundergo the conversion to the HighJump system first. Once that process functionssmoothly, other functions will be added.99 Cents Only Stores planned to have the City of Commerce distribution center runningon HighJump technology beginning in the fall of 2004. The need for improved systemshad become very apparent. In mid-2004, the company's stock price had fallen around 50percent. One factor contributing to the falloff was that the California distribution centerwas working beyond its means, which decreased productivity, affected deliveryschedules, and left stores unable to replenish their shelves. Overall the chain experiencedlower same-store sales and increased sales of products with lower profit margins. By2006, 99 Cents Only Stores was seeing positive trends in same-store-sales. The companydid experience a loss in net income for the quarter ending September 30, 2006 ascompared to 2005. This was due to $1.8 million in temporary labor costs to implementinventory control and initiatives, $2 million in expenditures for consulting and accountingrelated to the annual audit and Sarbanes-Oxley compliance requirements. The latterresulted in several delays in filing the company's Form 10-K for fiscal 2006.99 Cents Only Stores has to regularly reevaluate its inventory control procedures andexpand its warehouse capacity. To bolster the company's leadership, CEO Eric Schifferannounced an organizational realignment in November 2006. The distribution andtransportation departments were placed under the wings of Jeff Gold, who was already incharge of store operations. Jim Parros came aboard to full the new position of SeniorVice President of Logistics. Buying and merchandise planning reported directly toSchiffer. 99 Cents Only Stores will continue to explore advanced information technologygiving the highest priority to technology initiatives that promise the best return oninvestment (ROI). If a new project comes along that offers a better opportunity toimprove the business, the company will shift gears even if the previous project has notbeen deployed fully. The company still receives most of the benefit of the first project,and doesn't miss out on a new opportunity. Can 99 Cents Only Stores continue to rely onthe uneasy relationship between leading-edge technology and a bottom-line-orientedbusiness to rebound from its recent struggles?

1. Analyze 99 Cents Only Stores using the value chain and competitive forcesmodels.

2. Evaluate the current business strategy of 99 Cents Only Stores in response to itscompetitive environment. What is the role of information technology infrastructurein that strategy? How does it provide value for 99 Cents Only Stores?

3. How effective is 99 Cents Only Stores' strategy for IT infrastructure investments?

Explain your answer.

4. How successful have 99 Cents Only Stores' strategy and use of informationsystems been in addressing the company's problems? What kind of problems canthey solve? What are some of the problems that they cannot address?